ERM Myths&Truths: effectively managing the company's corporate risk landscape can better enable an organization to proactively identify and leverage events as they evolve, to manage the risk by maximizing its upside and minimizing the downside.

• Author: Kimmel, Bart W.
• Position: ENTERPRISE RISK MANAGEMENT

Stakeholders want to make sure the companies in which they have an interest are managed responsibly, with a balance of efficiency and resiliency. This scrutiny reflects the growing sophistication of today's stakeholders--investors, employees, regulators, customers, the public and the media--who want to know just how well these companies are being run.

The answer, in many cases, is that companies could be run better.

Risk that goes undetected can derail even the best-laid set of goals and business objectives. Organizations that understand the events that may affect their strategy, product development or services delivery--and could have an impact on growth, market share and corporate health--are better equipped than others to anticipate and react to risk events that can alter the course of the business.

That's the purpose of enterprise risk management (ERM) programs, to enable management to understand the organization's risk environment and make decisions to optimize performance within that environment.

Many organizations are unsure how to implement an ERM program in a way that provides quick, early and measurable results within a reasonable budget. Part of the confusion may be due to myths about ERM that tend to cloud the truth about the ability of this powerful risk management ally to steer companies in the right direction.

A Role in Organizational Strategy

ERM does more than just manage downside risk. It also highlights areas where taking on more risk makes sense.

Since implementing an ERM program in 2006, the LEGO Group has become more aggressive, with remarkable results. Hans Lasssoe, the senior director of strategic risk for LEGO, said that ERM quickly showed that the Denmark-based toy company was operating more conservatively than necessary. Enterprise-wide exposure measures identified by ERM indicated the company was less vulnerable to market fluctuations than management had thought. ERM also alerted management to areas where the company could reasonably take on more risk.

As a result of the ERM findings, LEGO adjusted its risk profile and invested more aggressively in its manufacturing capacity and marketing expenditures. The adjustments improved financial performance significantly during a time when other toy manufacturers experienced dramatic declines.

LEGO itself had sustained massive losses in 2004 before returning to profitability in 2005. With the ERM-inspired risk strategy now fully implemented, total sales for 2010 are...